Bitcoin has value for many reasons but one of its most commonly cited use cases is as a safe-haven asset. Bitcoin is like a bank account that is not subject to the laws of any single jurisdiction which is one of the many reasons it has become a safe-haven of choice for many savers and investors. In a certain sense, you could view bitcoin as a sort of offshore account that makes tax havens obsolete.
What Is A Tax Haven?
A tax haven is a jurisdiction with low or no taxes to incentivize businesses and individuals to keep their holdings within their borders.
Some tax havens even have strong privacy laws to make it difficult or even illegal for banks and other financial institutions to reveal identifying information about their account holders. Some of the most notable tax havens are Switzerland, The Cayman Islands, Panama, The Netherlands, Ireland, and even The United States Of America if you’re not a US citizen.
How Do Tax Havens Work?
There are a number of ways that tax havens function but one of the most common ways is for a company or individual to create a secondary company in the tax haven and then sell a patent to this new company for a very small amount such as $1.
The primary company now has to pay a royalty to the secondary company to use the patent. This royalty is sometimes 100% of the profit. So now 100% of the profits generated by the primary company are paid to the secondary company and the secondary company pays little to no tax on that profit.
It gets better though.
When the primary company wants to use all of that money that is now owned by the secondary company in the tax haven jurisdiction, instead of spending it, they actually take out a loan from the bank that is holding the money. When they pay the loan back, not only does this mean that they don’t have to pay taxes on the money since you don’t have to pay taxes on borrowed money, but they can actually write off the interest on the loan. So they still have access to their own money and they actually get a tax write-off on that money for paying interest on a loan from themselves.
This kind of structure between 2 companies is called a shell corporation.
Now let’s recap all of that. Not only do companies make substantial profits, but they can then shelter those profits on a foreign jurisdiction, borrow money against those profits, get a tax write-off on the interest of the loan and then make even more profits with the borrowed money which they then sheltered in the tax haven. It’s a cycle that ultimately makes the rich even richer while “normal” people like you and me still have to pay taxes to the government.
The whole system from start to finish helps those with the largest amount of money to gain even larger amounts of money and pay little to no taxes on it. While this isn’t necessarily a problem in and of itself, the substantial barriers to entry create problems for the poorest people in the world who don’t have access to such advanced financial tools.
Setting Up A Shell Corporation
Since places like Panama, The Cayman Islands, and Switzerland have such strong banking privacy laws that protect these kinds of shell corporations, they tend to attract lots of wealthy businesses and individuals. Back in 2015, there was a leak from a Panamanian law firm, Mosac Fonseca that brought to light just how much money is sheltered in offshore jurisdictions by some of the world’s wealthiest elites. What’s even more notable is that even though it was one of the largest data leaks in history, Mosac Fonseca is not the largest law firm that facilitates the creation and management of these kinds of shell corporations.
Numbered Bank Accounts
Numbered bank accounts are also another way that tax havens preserve the privacy of their account holders. Instead of a traditional bank account with all sorts of identifying personal information such as your name, address, government ID number, and the like, numbered bank accounts are associated with limited account information and only a password is needed to send money out of an account.
So, if you have the account number and password for a numbered account, you don’t need to verify an ID in order to drain the balance. Does that sound familiar?
In October of 2001, The US Patriot Act was revised to make these kinds of numbered bank accounts pretty much illegal for international transactions. Now, these numbered accounts are almost exclusively used to between banks internally within Switzerland and other tax havens.
A Swiss Bank Account In your Pocket
In 2015, a guy named Barack Hussein Obama was being interviewed at the South by Southwest festival and encryption was a hot topic since there was a lot of controversy surrounding an FBI request for Apple to surrender the private keys to iMessage so they could investigate the contents of the phone of a shooter in San Bernardino, California.
He said, “if …technologically it is possible to make an impenetrable device or system where the encryption is so strong that there’s no key, there’s no door at all …because if in fact, you can’t crack that at all, if government can’t get in …then everyone is walking around with a Swiss bank account in their pocket.”
While many bitcoiners like to speculate that Barry was speaking specifically about bitcoin and not encryption/cryptography as a whole, I personally believe that he was speaking more broadly about cryptography and encryption.
If he was, in fact, talking about Bitcoin, then he’s a bit misinformed since Bitcoin is far more similar to a Swiss BANK in your pocket and not just a bank account.
So, how does bitcoin fix all of this?
Bitcoin Makes Tax Havens Obsolete
Historically, tax havens have only been available to the super-rich since they usually require large minimum balances and expensive lawyers to handle all of the legalities in order to keep the CEOs of both the primary company and the secondary company out of jail.
Bitcoin makes tax havens obsolete since it actually offers superior financial privacy and security without all of the barriers to entry that have kept poorer people from using them.
In order to open an account within a tax haven jurisdiction, you need to hire expensive law firms (such as Mosac Fonseca) and then have enough money to meet the bank’s minimum balance requirements. I did a little research and found that some banks have minimum balance requirements of $10,000,000 USD or more with a $10,000 fee just to open an account. Low-income households around the world simply do not have access to that kind of money.
Bitcoin, on the other hand, is a math-based framework that doesn’t exist in any single jurisdiction. In order to accept bitcoin as payment, all you need is a wallet that generates bitcoin addresses. Bitcoin doesn’t have a minimum balance, it doesn’t collect any information about its users and in order to spend the bitcoin at any given address, you only need the corresponding private key. In essence, Bitcoin acts just like a numbered bank account but without all of the friction and barriers to entry.
Bitcoin is actually better than these types of tax havens because it acts just like a numbered bank account but without all of the barriers to entry and the funds at any given Bitcoin address can’t just be frozen of seized in the event of a government subpoena or invasion.
MultiSig Addresses
If you use an address that requires multiple signatures (often called Multi-Sig) to send bitcoin, you can make it mathematically impossible to spend bitcoin at any given address unless you have multiple private keys. This allows anyone to store private keys in multiple jurisdictions so that any single government is mathematically incapable of seizing your bitcoin. When you compare Bitcoin to tax havens, it becomes pretty clear that tax havens are a thing of the past and Bitcoin is a thing of the future.
Time Locks
Time locks are yet another way that Bitcoin is unique when compared to tax havens. What makes time locks so awesome is that they can prevent anyone and everyone from spending any bitcoin that is time-locked. So even if your address is somehow compromised or seized, any time locked bitcoin is cryptographically out of the reach of any entity until the terms of the time lock have been met.
PSBT & Mesh Networks
Another growing development is BIP 178, which allows for partially signed Bitcoin transactions or PSBT for short. Instead of having your Bitcoin private keys on a mobile device or desktop wallet, PSBT allows you to HODL all of your private keys in a device that doesn’t or cannot connect directly to the internet at all. It’s the coldest form of hardware wallet that exists and more wallets are adding support for this improvement.
When you create a partially signed bitcoin transaction (PSBT for short), you sign a transaction on your cold storage wallet and you only pass the transaction signature to an internet-connected device such as a mobile phone or desktop computer.
Some wallet developers are even going as far as to create mesh networks that relay these PSBTs via mesh network and when a node that is connected to the internet receives that transaction, it broadcasts it to the blockchain so now people without direct internet access can potentially send and receive Bitcoin without their private keys with a device that never connects to the internet. That has some pretty amazing implications.
In my opinion, PSBT will become the new standard for storing your private keys offline. In only a few years, I predict that PSBT will become the standard for private key storage and every mobile and desktop wallet will support the ability to broadcast these partially signed Bitcoin transactions.
Bitcoin Mixing
Another amazing feature of Bitcoin is coin mixing. Mixing your Bitcoin is like you and hundreds of other people all have 1 Bitcoin that you purchased from a KYC’d exchange. To obfuscate the ownership of your coins, everyone sends their 1 Bitcoin to one of the other hundred people. Now it becomes much more labor-intensive to analyze the blockchain and see who owns which bitcoin since you mixed them all up with other people’s bitcoins. This is something that simply cannot be said of any banking institution.
Bitcoin’s Transparency
Another way that Bitcoin makes tax havens obsolete is the complete transparency of the Bitcoin blockchain. Since all payments made on-chain are 100% public, things can be publicly audited by any business, individual, or government. This makes it more difficult to get away with using Bitcoin to commit crimes where there is an actual victim.
Since any given bitcoin address is just a string of numbers and letters, each and every Bitcoin address is similar to having a Swiss numbered bank account in your pocket. While that may be true to some extent, Bitcoin is actually much better than a Swiss bank account since it offers even more security and doesn’t directly collect any information on its owners. Literally anyone can begin accepting bitcoin if they have access to the internet. Certain wallets will allow you to generate bitcoin addresses while being 100% offline with a device that never connects to the internet …EVER.
Use Bitcoin
Rather than going back to the old ways of banking in an attempt to restore tax havens and banking privacy, Bitcoin provides a better solution.
With the use of multisig addresses, time locks, PSBTs, and coin mixing, individuals and companies now have the means to store their money completely out of the reach of third parties.
Bitcoin makes tax havens obsolete not just because it allows people to store value outside of the control of third parties, but also because it enables financial freedom for people of every socioeconomic class in every jurisdiction in the world. Instead of being at the mercy of some of the largest and most powerful banks in the world, people now have access to financial tools that have historically only been available to the super-rich. It’s only a matter of time until the whole world realizes this and begins to use bitcoin as a safe haven asset. When that time comes, Bitcoin will have had effectively made tax havens obsolete.